Breaking the Millennial Debt Spiral

Finding ways to increase an entire generation’s wealth is a messy business.

That’s probably been the case for decades, but this time around things are even more complicated because Millennials—those born between the early 1980’s and early 1990’s—had the unenviable task of coming-of-age in the wake of the Great Recession. Despite having the distinction of being America’s largest working generation, Millennials have been entering one of the worst job markets in recent history while carrying unprecedented levels of debt and are struggling to attain the same levels of wealth achieved by previous generations.

“Financial capability is the opportunity to put knowledge into practice,” noted Dr. Terri Friedline during a recent event at New America, where she spoke with Parker Cohen of the Corporation for Enterprise Development (CFED), Sunaena Chhatry of the Consumer Financial Protection Bureau, and Vox education reporter Libby Nelson about how Millennials could change their financial fortunes for the better.

For Dr. Friedline, the best way to accomplish this is by giving Millennials the chance to practice financial decision-making. In her research, she has found that “the combination of having received financial education and being financially included via a savings account” is the most effective way to improve outcomes and help Millennials prepare for financial emergencies or work toward long-term purchases. “We see that savings accounts and credit cards perform pretty consistently [as tools for financial experiential learning],” Friedline explained.

The “financial capability as key to stability” argument is certainly an attractive proposal for a generation that has resorted to using the oft-mentioned “sharing economy” as a way of circumventing large expenses and unmanageable debt, but that doesn’t necessarily mean that knowing what an IRA is or having a small amount of savings will solve every financial struggle. Friedline acknowledged this tension by explaining that economic inequality adds enormous complexity the goal of increasing financial capability because it creates larger burdens for people with lower incomes. When financial emergencies arise, Millennials with access to higher incomes and family support are often able to use already-amassed savings to keep themselves afloat while their lower-income peers have to draw upon things like credit cards and payday loans just to get by. The discrepancy between high-income and low-income Millennials’ access to resources shouldn’t mean that pursuing financial capability is a less worthy endeavor, but it does point to the need for a conscious effort to address the unique challenges lower-income individuals face in an economy where assets matter.

If financial capability is the gateway to financial well-being for lower-income individuals and families, how can financial knowledge be made accessible to the people that need it most? When asked this question, Cohen identified the education sector as the perfect breeding ground for increasing financial knowledge and opportunity. “That time when a youth is starting to get their first paycheck and make different sorts of financial decisions on their own is an excellent time to get them educated so they make informed decisions,” he noted, highlighting Live the Solution’s AZ Earn to Learn initiative (which supports high school students by using financial education in conjunction with matching funds in order to teach the importance of saving money up for college)and the financial coaching program at New Mexico Community College as examples of how educational institutions could leverage their influence to improve the financial futures of students.

But even the fact that education can be a very important step towards financial stability for lower-income Millennials lacking an inherited stockpile of assets is itself a distraction from a paradoxical reality. Going to school isn’t simply a tool for reducing financial insecurity; it is oftentimes the very factor that exacerbates that insecurity.

“One of the things most people don’t realize is that although getting a bachelor’s degree is still a minority experience, going to college is actually an increasingly universal one,” Nelson explained, pointing out that “college is a major financial decision” for students and their families. Less-than-optimal systems of notifying students about their financial aid have only served to make concerns about rapidly accumulating student loans and appropriate borrowing amounts even more confusing, especially when they create scenarios where a student must drop out of school due to insufficient finances.

“I am a financially capable 28 year old woman, and if someone had told me ‘I am going to give you your salary for the next six months now, good luck with that,’ I hope I would still have something to eat in December, but I don’t really know,” Nelson joked when commenting on the common higher education practice of sending students financial aid notifications only once a semester. She emphasized that finding ways to get financial information to students “at the right time” is an important step in ensuring that Millennials can keep their heads above water. She commented that Indiana University came up with a particularly good way of accomplishing this task when it opted to notify students of their cumulative debt through an annual letter. While a letter may not seem like much, Nelson explained that the correspondence gave students a way of monitoring their borrowing and avoid the pitfall of crushing student debt.

Ultimately, the panelists agreed that sustainable solutions to debt will require a complete overhaul of how our society approaches financial education. Dr. Friedline's report suggests that a universal system of child savings accounts could be a catalyst for vastly improving financial capability if account access were paired with financial education. The panelists were optimistic that building greater financial capability was possible with the right combination of early education and access.

“We need to go beyond financial knowledge,” Chhatry urged. “Young people are developing their understanding of financial matters very early on.”